Economics for Managers - Chapter 1

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Microeconomics

The branch of economics that analyzes the decisions that individual consumers, firms, and industries make as they produce, buy, and sell goods and services.

Managerial economics

Microeconomics applied to business decision making.

Prices

The amounts of money that are charged for goods and services in a market economy. Prices act as signals that influence the behavior of both consumers and producers of these goods and services.

Outputs

The final goods and services produced and sold by firms in a market economy.

Inputs

The factors of production, such as land, labor, capital, raw materials, and entrepreneurship, that are used to produce the outputs, or final goods and services, that are bought and sold in a market economy.

Macroeconomics

The branch of economics that focuses on the overall level of economic activity, changes in the price level, and the amount of unemployment by analyzing group or aggregate behavior in different sectors of the economy.

Relative prices

The price of one good in relation to the price of another, similar good, which is the way prices are defined in microeconomics.

Markets

The institutions and mechaanisms used for the buying and selling of goods and services. The four major types of markets in microeconomic analysis are:

1) perfect competition

2) monopolistic competition

3) oligopoly

4) monopoly

Perfect competition

A market structure characterized by a large number of firms in an industry, an undifferentiated product, ease of entry into the market, and complete information available to participants.

Price-taker

A characteristic of a perfectly competitive firm in which the firm cannot influence the price of its product, but can sell any amount of its output at the price established by the market.

Profit

The difference between the total revenue that a firm receives for selling its product and the total cost of producing that product.

Market power

The ability of a firm to influence the prices of its products and develop other competitive strategies that enable it to earn large profits over longer periods of tiome.

Imperfect competition

Market structures of monopolistic competition, ologopoly, and monopoly, in which firms have some degree of markets power.

Monopoly

A market structure characterized by a single firm producing a product with no close substitutes.

Barriers to entry

Structural, legal, or regulatory characteristics of a firm and its market that keep other firms from easily producing the same or similar products at the same cost.

Monopolistic competition

A market structure characterized by a large number of small firms that have some market power as a result of producing differentiated products. This market power can be competed away over time.

Oligopoly

A market structure characterized by competition among a small number of large firms that have market power, but that must take their rivals' actions into account when developing their own competitive straegies.

Profit maximization

The assumed goal of firms, which is to develop strategies to earn the largest amount of profit possible. This can be accomplished by focusing on revenues, costs, or both.

Circular flow model

The macroeconomic model that portrays the level of economic activity as a flow of expenditures from consumers to firms, or producers, as consumers purchase goods and services produced by these firms. This flow then returns to consumers as income received from the production process.

Absolute price level

A measure of the overall level of prices in the economy.

Personal consumption expenditures (C)

The total amount of spending by households on durable goods, nondurable goods, and services in a given period of time.

Gross private domestic investment spending (I)

The total amount of spending on nonresidential structures, equipment, software, residential structures, and business inventories in a given period of time.

Government consumption expenditures and gross investment (G)

The toatl amount of spending by federal, state, and local governments on consumption outlays for goods and services, depreciation charges for existing structures and equipment, and investment capital outlays for newly acquired structures and equipment in a given period of time.

Net export spending (F)

The total amount of spending on exports (X) minus the total amount of spending on imports (M) or (F =X-M) in a given period of time.

Export spending (X)

The total amouint of spending on goods and services currently produced in one country and sold abroad to residents of other countries in a given period of time.

Import spending (M)

The total amount of spending on goods and services currently produced in other countries and sold to residents of a given country in a given period of time.

Gross domestic product (GDP)

The comprehensive measure of the total market value of all currently produced final goods and services within a country in a given period of time by domestic and foreign-supplied resources.

Monetary policies

Policies adopted by a country's central bank that influence the money supply, interest rates, and the amount of funds available for loans, which in turn, influence consumer and business spending.

Fiscal policy

Changes in taxing and spending by the executive and legislative branches of a country's national government that can be used to either stimulate or restrain the economy.